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Role of Financial and Productivity Shocks in the US and Japan: A Two-Country Economy

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  • Yue ZHAO

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    (yGraduate School of Economics, Kyoto University)

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    Abstract

    Jermann and Quadrini (2012) show that compared with productivity shocks, direct shocks to the credit system (" nancial shocks") have contributed to the most frequently observed dynamics of both real and nancial variables in the US within a closed economy framework. We develop a simple two-country model featuring an international bond market and enforcement constraints within both countries in an attempt to quantify the role of productivity and nancial shocks. We construct time series of productivity shocks and nancial shocks using the US and Japanese quarterly data since 2001 and conduct simultaneous replication on major indicators of real variables and aggregate nancial ows. The main results were as follows. First, for both the US and Japan, productivity shocks account for most real variable dynamics such as output and investment, while nancial shocks well capture the trend of consumption, current account, and labor trends in the US and succeed in replicating Japan's debt repurchase behavior. Nevertheless, it is noteworthy that nancial shocks served as key factors in accounting for the observed troughs of output, labor, and consumption, as well as the peaks of debt repurchase and the US current account during the 2007-09 nancial crisis. Second, it is surprising that observable international spillover e ect appeared only in Japan's debt repurchases. As it is widely considered that the Japanese economy have been deeply in uenced by US economic uctuations, our quantitative results raise questions about this opinion.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP881.pdf
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    Bibliographic Info

    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 881.

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    Length: 45pages
    Date of creation: Dec 2013
    Date of revision:
    Handle: RePEc:kyo:wpaper:881

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    Keywords: Business uctuations; nancial friction; open economy; simulation;

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    1. Robert Kollmann, 2013. "Global Banks, Financial Shocks And International Business Cycles: Evidence From An Estimated Model," CAMA Working Papers 2013-30, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Working Papers 132010, Hong Kong Institute for Monetary Research.
    3. Robert Kollmann & Zeno Enders & Gernot J. Mueller, 2011. "Global banking and international business cycles," Globalization and Monetary Policy Institute Working Paper 72, Federal Reserve Bank of Dallas.
    4. Enrique G. Mendoza & Katherine A. Smith, 2004. "Quantitative Implication of A Debt-Deflation Theory of Sudden Stops and Asset Prices," NBER Working Papers 10940, National Bureau of Economic Research, Inc.
    5. Kuroda, Sachiko & Yamamoto, Isamu, 2008. "Estimating Frisch labor supply elasticity in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 566-585, December.
    6. Keisuke Otsu, 2011. "Accounting for Japanese Business Cycles: A Quest for Labor Wedges," Studies in Economics 1106, Department of Economics, University of Kent.
    7. Keisuke Otsu, 2009. "International Business Cycle Accounting," IMES Discussion Paper Series 09-E-29, Institute for Monetary and Economic Studies, Bank of Japan.
    8. Chakraborty, Suparna, 2009. "The boom and the bust of the Japanese economy: A quantitative look at the period 1980-2000," Japan and the World Economy, Elsevier, vol. 21(1), pages 116-131, January.
    9. Sohei Kaihatsu & Takushi Kurozumi, 2014. "Sources of Business Fluctuations: Financial or Technology Shocks?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 224-242, April.
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